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RAM Ratings reaffirms AA2 rating of ProHAWK's Sukuk

August 31, 2014

RAM Ratings has reaffirmed the AA2/Stable rating of Konsortium ProHAWK Sdn Bhd's (ProHAWK or the Company) Sukuk Murabahah Programme (Sukuk) of up to MYR 900 million.

ProHAWK is a single-purpose company established to finance, develop, design, construct and commission the 600-bed Women and Children Hospital (the Project) within Hospital Kuala Lumpur and to carry out asset management services for the Project, under a 30-year Concession Agreement (CA) with the Government of Malaysia (GOM). The Company is a 65:35 joint venture between UEM Group Berhad (UEM) and Najcom Sdn Bhd.

The rating reflects ProHAWK's strong debt-servicing ability that is backed by contractual cashflow. Upon completion of the Project by October 2016, ProHAWK will receive a predictable stream of concession payments over the following 27 years in the form of Availability Charges and Maintenance Service Charges. "The Company's debt-servicing ability is viewed as strong, with projected stressed minimum Finance Service Cover Ratios of 1.50 times. Counterparty risk is low as the obligor of the concession payments is the GOM, with funds allocated through the Ministry of Health", said Thong Mun Wai, RAM's Head of Real Estate and Construction Ratings.

Various measures in the financing structure of the transaction minimise cashflow leakage. These include limits on ProHAWK's activities and indebtedness. Concession payments will be directly deposited in key designated accounts operated by the Facility Agent, which strictly manages cash inflows and outflows. Distributions to shareholders and the payment of obligations under subordinated shareholder advances will only be allowed after the first redemption of the Sukuk, provided that the FSCR does not dip below 1.50 times after such payments are made and there are no breaches and events of default under the transaction documents.

However, compared to other RAM-rated private finance initiative (PFI) transactions, the Project is technically more challenging as it involves the provision of medical equipment as well as related mechanical and engineering works. Furthermore, asset management services for hospitals are more complex than that required for other government buildings in terms of scope and service levels. Nonetheless, these concerns are mitigated by strong support from UEM. During the construction stage, the Company's shareholders will provide Sukuk holders a joint and several undertaking to fund any shortfall in costs required to complete the Project and applicable penalties under the relevant Project Documents, should there be delays or breaches of obligations under the CA.

As with other PFI transactions, the timeliness of monthly concession payments from the GOM is a key risk factor post-completion of the Project, as ProHAWK will rely heavily on these payments to meet its obligations under the proposed Sukuk. That said, the Finance Service Reserve Account, which will have a minimum balance equivalent to the principal and profit due on the Sukuk for the next six months, provides a buffer in the event of payment delays.

The transaction is exposed to termination risk under the CA. Non-performance on the part of either ProHAWK or the GOM could trigger the termination of the CA. While termination due to default by the GOM is seen to be remote, default by ProHAWK is possible, especially during the construction stage. Nevertheless, Sukuk holders will be fully compensated in such an event, after the Project's completion.

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Source: CPI Financial

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